Psion keeps in good company

LONDON (CBS.MW) -- Shares in information technology group Psion PLC have tripled in value over the past year, and analysts say the company's links to the wireless handheld device market could lead to explosive growth two to three years down the road.

Psion has a 28.1 percent stake in Symbian, its joint venture with four of the world's biggest mobile handset manufacturers. Symbian provides the operating system for wireless software such as handheld computers and smartphones.

But judging by the volatile activity seen in its shares, Psion may not be for the faint-hearted. Shares, which trade on London's FTSE 350 have bounced between a low point of just under 300 in mid-1998, to the current level of 965 pence. Analysts say a lack of new products over the past two years and increased visibility for the company have toyed wth shares.

Psion made its name on palm-top computers in the 1980s, and has since moved into developing portable computers, modems and application software.

Its core business lies in the consumer and enterprise market, but the company has also moved towards using its technology for industrials, which is where the Symbian links come in.

Analysts are now waiting to see if Symbian's system, dubbed EPOC, becomes industry standard, much like Microsoft Windows has been industry standard for personal computers. With Europe the lead producer of wireless devices, they say the company has a good shot, but Microsoft Corp.
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itself is in the race to become the preferred industry system, posing the biggest risk to Symbian and, consequently, Psion shares.

Fortunes at Symbian

According to Paul Kavanagh, who heads research at Killik & Co. Stockbrokers, the market need for operating systems is expected to grow to 600 million units by 2004, with royalties average $5 to $10 per unit, bringing $3 to $6 billion to the whole industry.

"Psion's shares remain the obvious route for access to Symbian and we remain buyers," Kavanagh said, who has a 12-month price target of 880 pence for Psion.

Psion developed the EPOC system originally for its own organizer, but it was then found to be easily adaptable to mobile communications. Symbian was launched over a year ago and boasts major mobile phone producers such as Nokia Oyj
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Motorola Inc.
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Ericsson AB
ericy
and Masushita Communications Industrial Co. as equity holders. See related story

Symbian was formed because mobile manufacturers, who were expecting rapid growth for the market, worried that if they had to turn to Microsoft for an operating system, they'd gradually lose margins.

On Symbian's side, analysts say Microsoft's competing system, Windows CE, hasn't been as successful at drawing partners, but some analysts still say the game isn't over yet.

"Psion is one of the few pure U.K. plays on our expected explosion in next generation wireless devices," said Andrew Bryant, research analyst with BancBoston Robertson Stevens, whose firm initiated coverage on Psion in June with a long-term attractive rating.

"However, this is clearly a market in which Microsoft would like to get ownership of, and we believe there is a 6 to 12 month window of opportunity for Microsoft to propel itself back into the market and convince the major players of the value of Windows CE."

Kavanagh says, though, that Psion's links to Symbian will mean profits take off in two or three years time. And as Symbian is estimated to have between 70 and 80 percent of market share for operating systems, "they should have market sewn up."

"Microsoft will have a tough time breaking into this," he said.

Relying on the handheld market

Psion's slowness in bringing out new products has weighed on shares, though. It brought out its first new palmtop in two years this summer, but analysts said the market hasn't gotten overly excited about the new product.

Part of this, said Ian Burgess, technology analyst with Credit Suisse First Boston, is that consumers have been confused by the sheer number of products available. They estimate that the mobile handset market, alone, itself is expected to grow to over 600 million units by 2004.

Over the past 10 years, Psion's turnover has grown from $64.7 million (40 million pounds) to over $240 million. Market capitalization stands at 726 million pounds. But in 1998, revenues declined to 76.2 million. The company warned that the first half of 1999 would be weak because of the money it's investing in Symbian and slower trading in the Psion Computers division.

Bryant said Psion is well-placed to move ahead in a soaring industry which is going to end up with mobile phones that allow Internet access and emails. But his firm still values Psion's core business at 225pence per share, with the Symbian stake worth $750 million, or 610 pence per share.

Analysts said risks to Psion's core business is that it faces competition and challenges from newer technologies and market players, and that Symbian lets the team down on delivering a de facto standard.

"In combination, there is also the risk that any perceived weakness in either the core business or Symbian, or domination of value by the Symbian business, will prevent realization of the optimal value from the business as a whole," said Bryant.

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